Bristol-Myers Squibb Co (BMY) to Sell Diabetes Portfolio

Bristol-Myers Squibb Co (NYSE:BMY) will be selling its global diabetes business to long-time collaborator, AstraZeneca plc (ADR) (NYSE:AZN), for an upfront payment of $2.7 billion. Bristol-Myers’ shares gained around 2.4% on the news and also reached a 52-week high of $54.49. The company also provided its outlook for 2014.

Diabetes Business Sale

Apart from the upfront payment, Bristol-Myers Squibb Co (NYSE:BMY) is also expected to receive sales-based milestone payments of up to $1.4 billion along with royalty payments based on net sales through 2025. AstraZeneca will also make payments to the tune of $225 million related to some asset transfer conditions.

The deal is expected to close in the first quarter of 2014. Bristol-Myers will receive an estimated $3.4 billion in that period, including the upfront payment and an additional $700 million assuming Forxiga (dapagliflozin) is approved in the U.S. The FDA’s decision on Forxiga, which is already approved in the EU for type II diabetes, is expected by Jan 11, 2014.

Bristol-Myers Squibb Co (NYSE:BMY)’s collaboration with AstraZeneca dates to 2007, when the companies initially collaborated to jointly research, develop and commercialize select type II diabetes candidates. Later, the agreement was broadened to include other diabetes products.

The existing collaboration between the companies will now be terminated and AstraZeneca plc (ADR) (NYSE:AZN) will gain global rights to major diabetes products like Onglyza, Kombiglyze XR/Komboglyze, Forxiga, Byetta, Bydureon and Symlin. The agreement also includes lipodystrophy candidate, metreleptin, which is under regulatory review in the U.S. with a final decision expected by Feb 27, 2014.

Bristol-Myers will however continue to conduct and fund certain clinical studies on Onglyza and Forxiga through 2016.

Guidance

Bristol-Myers Squibb Co (NYSE:BMY) expects the deal to be earnings accretive in the first few years. However, it believes that the effect will slowly dilute in the latter half of the current decade. Assuming the deal closes in the first quarter of 2014, Bristol-Myers expects its 2014 non-GAAP earnings to be in the range of $1.65 to $1.80 per share. The Zacks Consensus Estimate of $1.91 is however above the company’s latest guidance.

Bristol-Myers also expects the transaction to positively impact its gross margin. The company expects its 2014 research and development expenses to remain flat on a year over year basis. Meanwhile, the company’s 2014 selling, general and administrative expenses are expected to decline year over year mainly due to lower commercial expenses.

Our Take

We view the transaction as a clear step toward Bristol-Myers Squibb Co (NYSE:BMY) evolving as a specialty care-oriented company. The diabetes business was not doing particularly well especially products like Bydureon, so we view this transaction as a positive. With Bristol-Myers’ global diabetes business sold off, we expect the company’s primary focus to be on its existing portfolio of oncology, neurosciences, immunology, cardiovascular and virology.

Moreover, Bristol-Myers’ important products like Abilify and Sustiva are expected to lose their exclusivity in the coming years. This will pose a challenge for the company in terms of replacing lost revenues with new products. Bristol-Myers currently has a lot of late-stage candidates in its pipeline, with a probability of hitting the market in the coming quarters.